Efficiency and Equity Flashcards
How are scarce resources allocated by?
Market price Command Majority rule Contest First-come, first-served Lottery Personal characteristics Force
Explain market price
When a market allocates a scarce resource, people who get the resource are those who are willing to pay the market price.
Explain command
Command system allocates resources by the order (command) of someone in authority.
Ex. boss, dictator
Explain majority rule
Allocates resources in the way the majority of voters choose
Ex. Parliament votes to decide to increase the tax rate to the rich, allocate budget in education, etc.
Explain contest
allocates resources to a winner (or group of winners)
Explain first come, first serve
Allocates resources to those first in line
Explain lottery
Allocates resources to those with the winning number or who come up lucky on other gaming systems
Explain personal characteristics
Allocate resources to those with the right characteristics
Ex. VIP tickets
Explain force
War, theft, government legislation may force the transfer of wealth from the rich to the poor.
What is individual demand?
The relationship between the price of a good and the quantity demanded by an individual.
What is market demand?
The relationship between the price of a good and the quantity demanded by all buyers.
What is consumer surplus?
The excess of the benefit received from a good over the amount paid for it?
How do we calculate consumer surplus?
CS= benefit received –the amount paid.
CS from one unit = MB –Price paid.
CS from all units = total benefits –total expenditure
What is marginal cost?
The minimum price that a firm is willing to accept. But the minimum supply price determines supply. A supply curve is an MC curve.
What is individual supply?
The relationship between the price of a good and the quantity supplied by one producer.
What is market supply?
The relationship between the price of a good and the quantity supplied by all producers.
What is producer surplus?
The excess of the amount received from the sale of a good or service over the cost of producing it.
How do we calculate producer surplus?
S = Revenue –the total (variable) cost of production.
PS from one unit = price received for that unit –MC of that unit.
On a graph, producer surplus is shown by the area below the market price and above the supply curve, summed over the quantity sold.
When is the competitive market efficient?
When production is less than the equilibrium quantity, MSB> MSC. In this case, you can increase total surplus by producing more or greater than the equilibrium quantity, MSC> MSB. Production is too much and total surplus can be increased by decreasing production.
What is the invisible hand idea?
implied that competitive markets send resources to their highest-valued use in society. Consumers and producers pursue their own self-interest and interact in markets. Market transactions generate an efficient—highest valued—use of resources.
What is market failure?
arises when a market fails to maximize the total surplus (CS+PS). Market failure occurs due to either underproduction or overproduction.
How do you calculate market failure?
TS = Total benefits –total costs
Describe underproduction?
If the quantity producer is inefficient and there is underproduction and the total surplus is smaller than its maximum possible level.
What is deadweight loss?
A measure of inefficiency is equal to the decrease total surplus that results from an inefficient level of production.
